<PAGE>
INDEX TO FINANCIAL STATEMENTS
HOMEFREE VILLAGE RESORTS, INC. AND HOMEFREE INVESTORS L.P.
- ----------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
PAGE
----
INDEPENDENT AUDITOR'S REPORT.................................................................... S-1
COMBINED BALANCE SHEETS - December 31, 1996 (unaudited) and 1995................................ S-2
COMBINED STATEMENTS OF OPERATIONS - For the Years Ended December 31, 1996 (unaudited),
1995, and 1994.............................................................................. S-4
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' DEFICIT - For the Years Ended
December 31, 1996 (unaudited), 1995, and 1994............................................... S-5
COMBINED STATEMENTS OF CASH FLOWS - For the Years Ended December 31, 1996 (unaudited),
1995, and 1994.............................................................................. S-6
HOMEFREE VILLAGE RESORTS, INC.
- ------------------------------
INDEPENDENT AUDITOR'S REPORT.................................................................... S-8
CONSOLIDATED BALANCE SHEETS - December 31, 1996 (unaudited), and 1995........................... S-9
CONSOLIDATED STATEMENTS OF OPERATIONS - For the Years Ended December 31, 1996 (unaudited),
1995, and 1994.............................................................................. S-11
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - For the Years Ended December 31,
1996 (unaudited), 1995, and 1994............................................................ S-12
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years Ended December 31, 1996 (unaudited),
1995, and 1994.............................................................................. S-13
HOMEFREE INVESTORS L.P.
- -----------------------
INDEPENDENT AUDITOR'S REPORT.................................................................... S-15
BALANCE SHEETS - December 31, 1996 (unaudited), and 1995........................................ S-16
STATEMENTS OF OPERATIONS - For the Years Ended December 31, 1996 (unaudited), 1995, and 1994.... S-17
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT) - For the Years Ended December 31, 1996 (unaudited),
1995, and 1994.............................................................................. S-18
STATEMENTS OF CASH FLOWS - For the Years Ended December 31, 1996 (unaudited), 1995, and 1994.... S-19
NOTES TO FINANCIAL STATEMENTS................................................................... S-20
ARISTEK PROPERTIES, LTD.
- ------------------------
INDEPENDENT AUDITOR'S REPORT.................................................................... S-31
CONSOLIDATED BALANCE SHEETS - December 31, 1996 (unaudited), and 1995........................... S-32
CONSOLIDATED STATEMENTS OF OPERATIONS - For the Years Ended December 31, 1996 (unaudited),
1995, and 1994.............................................................................. S-33
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT - For the Years Ended
December 31, 1996 (unaudited), 1995, and 1994............................................... S-34
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years Ended December 31, 1996 (unaudited),
1995, and 1994.............................................................................. S-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................................................... S-37
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Homefree Village Resorts, Inc.
Denver, Colorado
To the Partners
Homefree Investors L.P.
Denver, Colorado
We have audited the accompanying combined balance sheet of Homefree Village
Resorts, Inc. (a Delaware Corporation) and subsidiaries and Homefree Investors
L.P. (a Massachusetts limited partnership) as of December 31, 1995, and the
related combined statements of operations, stockholders' equity and partners'
deficit, and cash flows for the years ended December 31, 1995 and 1994. These
financial statements are the responsibility of the Company's and Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Homefree Village
Resorts, Inc. and subsidiaries and Homefree Investors L.P. as of December 31,
1995, and the results of their operations and their cash flows for the years
ended December 31, 1995 and 1994 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company and the Partnership will continue as a going concerns, which contemplate
the realization of assets and liquidation of liabilities in the normal course of
business. As discussed in Note 1 to the financial statements, the Company and
the Partnership have suffered substantial operating losses, and anticipate the
need for additional cash to fund operations. These conditions raise substantial
doubt about the ability of the Company and the Partnership to continue as a
going concern. Management's plans in regard to these matters are also discussed
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Hein + Associates llp
Denver, Colorado
June 12, 1996
S-1
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND SUBSIDIARIES
AND HOMEFREE INVESTORS L.P.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
----------- -----------
(unaudited)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 20,000 $ 38,700
Other current assets 14,700 4,000
---------- ----------
Total current assets 34,700 42,700
RECEIVABLES FROM UNCONSOLIDATED ENTITIES, net 8,316,700 8,620,200
INVESTMENTS IN UNCONSOLIDATED ENTITIES 70,600 82,400
PROPERTY AND EQUIPMENT, at cost:
Office furniture and equipment 104,800 102,900
Vehicles 25,000 25,000
---------- ----------
129,800 127,900
Accumulated depreciation (116,300) (110,000)
---------- ----------
Net property and equipment 13,500 17,900
LAND OPTION COSTS 195,600 195,600
---------- ----------
TOTAL ASSETS $8,631,100 $8,958,800
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
S-2
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND SUBSIDIARIES
AND HOMEFREE INVESTORS L.P.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ ------------
(unaudited)
------------
LIABILITIES, STOCKHOLDERS' EQUITY AND PARTNERS' DEFICIT
-------------------------------------------------------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 106,500 $ 94,600
Payable to unconsolidated entities 568,500 150,500
Current maturities of long-term debt 44,400 44,400
----------- -----------
Total current liabilities 719,400 289,500
----------- -----------
LONG-TERM DEBT, less current maturities:
Unconsolidated entity 7,154,500 7,154,500
Other - -
DEFERRED INCOME TAXES - -
DEFERRED PROFIT 488,500 488,500
COMMITMENTS AND CONTINGENCIES (Notes 1, 3 and 8)
STOCKHOLDERS' EQUITY AND PARTNERS' DEFICIT:
Preferred stock, $1.00 par value; 3,000,000 shares authorized; none
issued and outstanding - -
Common stock, $.001 par value; 15,000,000 shares authorized;
10,484,000 shares issued and outstanding 10,500 10,500
Additional paid-in capital 3,537,000 3,537,000
Accumulated deficit (3,049,800) (2,293,100)
Partners' deficit - limited partners (229,000) (228,100)
----------- -----------
Total stockholders' equity and partners' deficit 268,700 1,026,300
----------- -----------
TOTAL LIABILITIES, STOCKHOLDERS' EQUITY AND
PARTNERS' DEFICIT $ 8,631,100 $ 8,958,800
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
S-3
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND SUBSIDIARIES
AND HOMEFREE INVESTORS L.P.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(unaudited)
REVENUES:
<S> <C> <C> <C>
Management and administrative fees from
unconsolidated entities $ 259,500 $ 245,400 $ 244,600
Equity in earnings of AWP 10,200 11,000 10,800
Interest 515,200 512,100 555,300
----------- ----------- -----------
784,900 768,500 810,700
EXPENSES:
General and administrative 984,100 450,900 429,400
Interest 502,400 503,900 549,600
Equity in losses of APL 22,000 23,000 26,000
Loss on related party receivables (41,000) 147,300 53,700
Administrative fee 75,000 75,000 75,000
----------- ----------- -----------
1,542,500 1,200,100 1,133,700
LOSS BEFORE INCOME TAXES (757,600) (431,600) (323,000)
DEFERRED INCOME TAX BENEFIT - 200,000 87,000
----------- ----------- -----------
NET LOSS $ (757,600) $ (231,600) $ (236,000)
=========== =========== ===========
NET LOSS PER PAIRED SHARE $(.07) $(.02) $(.02)
=========== =========== ===========
WEIGHTED AVERAGE PAIRED SHARES OUTSTANDING 10,484,000 10,484,000 10,484,000
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
S-4
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND SUBSIDIARIES
AND HOMEFREE INVESTORS L.P.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
Common Additional
Paired Stock Paid-in Accumulated Partners'
Shares Amount Capital Deficit Deficit Total
---------- ------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1994 10,484,000 $10,500 $3,537,000 $(1,826,100) $(227,500) $1,493,900
Net loss - - - (235,700) (300) (236,000)
---------- ------- ---------- ----------- --------- ----------
BALANCES, December 31, 1994 10,484,000 10,500 3,537,000 (2,061,800) (227,800) 1,257,900
Net loss - - - (231,300) (300) (231,600)
---------- ------- ---------- ----------- --------- ----------
BALANCES, December 31, 1995 10,484,000 $10,500 $3,537,000 $(2,293,100) $(228,100) $1,026,300
Net loss (unaudited) - - - (756,700) (900) (757,600)
---------- ------- ---------- ----------- --------- ----------
BALANCES, December 31, 1996 (unaudited) 10,484,000 $10,500 $3,537,000 $(3,049,800) $(229,000) $ 268,700
========== ======= ========== =========== ========= ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
S-5
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND SUBSIDIARIES
AND HOMEFREE INVESTORS L.P.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(757,600) $(231,600) $(236,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 6,300 6,400 6,300
Amortization - - -
Equity in losses of unconsolidated entities, net 11,800 12,000 15,200
Provision for loss on related party receivables (41,000) 147,300 53,700
Deferred income taxes - (200,000) (87,000)
Changes in operating assets and liabilities:
Decrease (increase) in:
Accrued interest receivable - officer and director (11,300) (12,100) (15,300)
Other assets (10,700) 5,600 (23,200)
Receivables from unconsolidated entities - (3,600) 49,600
Increase (decrease) in:
Accounts payable and accrued expenses 11,900 1,000 37,300
Other - (3,400) -
--------- --------- ---------
Net cash used in operating activities (790,600) (278,400) (199,400)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash advances/collections to officer and director 52,300 (135,200) (38,400)
Cash advances to unconsolidated entities - - (700)
Collection of advances from unconsolidated entities 303,500 299,000 374,900
Investment in unconsolidated entities - - (50,000)
Purchase of equipment (1,900) (7,800) (11,300)
--------- --------- ---------
Net cash provided by investing activities 353,900 156,000 274,500
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance from related party 418,000 150,500 -
Payments under land option contract - - (88,400)
Principal payments on long-term debt - - (10,600)
--------- --------- ---------
Net cash provided by (used in) financing activities 418,000 150,500 (99,000)
--------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
S-6
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND SUBSIDIARIES
AND HOMEFREE INVESTORS L.P.
COMBINED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------
1996 1995 1994
----------- -------- ----------
(unaudited)
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (18,700) 28,100 (23,900)
CASH AND EQUIVALENTS, beginning of year 38,700 10,600 34,500
-------- ------- --------
CASH AND EQUIVALENTS, end of year $ 20,000 $38,700 $ 10,600
======== ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Interest $ - $ 3,900 $ 11,000
========== ======= ========
Income taxes $ - $ - $ -
========== ======== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES -
Obligation under land option contract $ - $ - $160,600
========== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
S-7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Homefree Village Resorts, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Homefree Village
Resorts, Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1995,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the years ended December 31, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Homefree Village
Resorts, Inc. and subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for the years ended December 31, 1995 and 1994
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and liquidation of liabilities in the normal course of business. As
discussed in Note 1 to the financial statements, the Company has suffered
substantial operating losses and anticipates the need for additional cash to
fund operations. These conditions raise substantial doubt about the ability of
the Company to continue as a going concern. Management's plans in regard to
these matters are also discussed in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Hein + Associates LLP
Denver, Colorado
June 12, 1996
S-8
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ ------------
(unaudited)
ASSETS
------
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $ 20,000 $ 38,700
Other current assets 14,700 4,000
---------- ----------
Total current assets 34,700 42,700
RECEIVABLES FROM UNCONSOLIDATED ENTITIES, net 8,316,700 8,620,200
INVESTMENTS IN UNCONSOLIDATED ENTITIES 70,600 82,400
PROPERTY AND EQUIPMENT, at cost:
Office furniture and equipment 104,800 102,900
Vehicles 25,000 25,000
---------- ----------
129,800 127,900
Accumulated depreciation (116,300) (110,000)
---------- ----------
Net property and equipment 13,500 17,900
LAND OPTION COSTS 195,600 195,600
---------- ----------
TOTAL ASSETS $8,631,100 $8,958,800
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
S-9
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 106,500 $ 94,600
Payable to unconsolidated entities 568,500 150,500
Current maturities of long-term debt 44,400 44,400
----------- -----------
Total current liabilities 719,400 289,500
LONG-TERM DEBT, less current maturities:
Unconsolidated entity 7,154,500 7,154,500
DEFERRED PROFIT 488,500 488,500
COMMITMENTS AND CONTINGENCIES (Notes 1, 3 and 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 3,000,000 shares authorized;
none issued and outstanding - -
Common stock, $.001 par value; 15,000,000 shares authorized;
10,484,000 shares issued and outstanding 10,500 10,500
Additional paid-in capital 3,537,000 3,537,000
Accumulated deficit (3,278,800) (2,521,200)
----------- -----------
Total stockholders' equity 268,700 1,026,300
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,631,100 $ 8,958,800
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
S-10
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(unaudited)
REVENUES:
<S> <C> <C> <C>
Management and administrative fees from
unconsolidated entities $ 259,500 $ 245,400 $ 244,600
Equity in earnings of AWP 10,200 11,000 10,800
Interest 515,200 512,100 555,300
----------- ----------- -----------
784,900 768,500 810,700
EXPENSES:
General and administrative 983,200 450,600 429,100
Interest 502,400 503,900 549,600
Equity in losses of APL 22,000 23,000 26,000
Impairment of investment in HILP 900 300 300
Loss on related party receivables (41,000) 147,300 53,700
Administrative fee 75,000 75,000 75,000
----------- ----------- -----------
1,542,500 1,200,100 1,133,700
LOSS BEFORE INCOME TAXES (757,600) (431,600) (323,000)
DEFERRED INCOME TAX BENEFIT - 200,000 87,000
----------- ----------- -----------
NET LOSS $ (757,600) $ (231,600) $ (236,000)
=========== =========== ===========
NET LOSS PER COMMON SHARE $(.07) $(.02) $(.02)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON 10,484,000 10,484,000 10,484,000
SHARES OUTSTANDING =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
S-11
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
---------- -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1994 10,484,000 $10,500 $3,537,000 $(2,053,600) $1,493,900
Net loss - - - (236,000) (236,000)
---------- -------- ----------- ----------- ----------
BALANCES, December 31, 1994 10,484,000 10,500 3,537,000 (2,289,600) 1,257,900
Net loss - - - (231,600) (231,600)
---------- -------- ----------- ----------- ----------
BALANCES, December 31, 1995 10,484,000 10,500 3,537,000 (2,521,200) 1,026,300
Net loss (unaudited) - - - (757,600) (757,600)
---------- -------- ----------- ----------- ----------
BALANCES, December 31, 1996 (unaudited) 10,484,000 $10,500 $3,537,000 $(3,278,800) $ 268,700
========== ======== =========== =========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
S-12
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(757,600) $(231,600) $(236,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 6,300 6,400 6,300
Equity in losses of unconsolidated entities, net 11,800 12,000 15,200
Impairment of investment in HILP 900 300 300
Provision for loss on related party receivables (41,000) 147,300 53,700
Deferred income tax benefit - (200,000) (87,000)
Changes in operating assets and liabilities:
Decrease (increase) in:
Accrued interest receivable - officer and director (11,300) (12,100) (15,300)
Other assets (10,700) 5,600 (23,200)
Receivables from unconsolidated entities - (3,600) 49,600
Increase (decrease) in:
Accounts payable and accrued expenses 11,900 1,000 37,300
Other - (3,400) -
--------- --------- ---------
Net cash used in operating activities (789,700) (278,100) (199,100)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash advances/collections to officer and director 52,300 (135,200) (38,400)
Cash advances to unconsolidated entities - - (700)
Collection of advances from unconsolidated entities 303,500 299,000 374,900
Investment in unconsolidated entities (900) (300) (50,300)
Purchase of equipment (1,900) (7,800) (11,300)
--------- --------- ---------
Net cash provided by investing activities 353,000 155,700 274,200
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance from related party 418,000 150,500 -
Payments under land option contract - - (88,400)
Principal payments on long-term debt - - (10,600)
--------- --------- ---------
Net cash provided by financing activities 418,000 150,500 (99,000)
--------- --------- ---------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
S-13
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (18,700) 28,100 (23,900)
CASH AND EQUIVALENTS, beginning of year 38,700 10,600 34,500
--------- --------- ---------
CASH AND EQUIVALENTS, end of year $ 20,000 $ 38,700 $ 10,600
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -
Cash paid for:
Interest $ - $ 3,900 $ 11,000
========== ========= =========
Income taxes $ - $ - $ -
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES -
Obligation under land option contract $ - $ - $ 160,600
========== ========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
S-14
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Partners
Homefree Investors L.P.
Denver, Colorado
We have audited the accompanying balance sheet of Homefree Investors L.P. (a
Massachusetts limited partnership) as of December 31, 1995, and the related
statements of operations, partners' capital (deficit) and cash flows for the
years ended December 31, 1995, and 1994. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Homefree Investors L.P. as of
December 31, 1995 and the results of its operations and cash flows for the years
ended December 31, 1995, and 1994 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern, which contemplates the realization
of assets and liquidation of liabilities in the normal course of business. As
discussed in Note 1 to the financial statements, the Partnership has suffered
losses from inception, and anticipates the need for additional cash to fund
operations. These conditions raise substantial doubt about the ability of the
Partnership to continue as a going concern. Management's plans in regard to
these matters are also discussed in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Hein + Associates LLP
Denver, Colorado
June 12, 1996
S-15
<PAGE>
HOMEFREE INVESTORS L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
----------- ----------
(unaudited)
ASSET
-----
<S> <C> <C>
CURRENT ASSET, receivable from Homefree Village Resorts, Inc. $ 568,500 $ 150,500
========== =========
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
CURRENT LIABILITIES:
Payable to HGP $ 749,000 $ 674,000
Payable to unconsolidated affiliates 568,500 150,500
---------- ---------
Total current liabilities 1,317,500 824,500
COMMITMENT (NOTE 8)
PARTNERS' DEFICIT (749,000) (674,000)
---------- ---------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 568,500 $ 150,500
========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
S-16
<PAGE>
HOMEFREE INVESTORS L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
REVENUE $ - $ - $ -
EXPENSES:
Administrative fee 75,000 75,000 75,000
General and administrative 900 300 300
----------- ----------- -----------
NET LOSS $ (75,900) $ (75,300) $ (75,300)
=========== =========== ===========
NET LOSS PER LIMITED PARTNERSHIP INTEREST $ (.01) $ (.01) $ (.01)
=========== =========== ===========
WEIGHTED AVERAGE LIMITED PARTNERSHIP 10,484,000 10,484,000 10,484,000
INTERESTS OUTSTANDING =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
S-17
<PAGE>
HOMEFREE INVESTORS L.P.
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
General Limited
Partner* Partners Total
---------- ----------- -----------
<S> <C> <C> <C>
BALANCES, January 1, 1994 $216,900 $(740,900) $(524,000)
Partner's capital contributions 300 - 300
Net loss (1,500) (73,800) (75,300)
-------- --------- ---------
BALANCES, December 31, 1994 215,700 (814,700) (599,000)
Partner's capital contributions 300 - 300
Net loss (1,500) (73,800) (75,300)
-------- --------- ---------
BALANCES, December 31, 1995 214,500 (888,500) (674,000)
Partner's capital contributions (unaudited) 900 - 900
Net loss (unaudited) (1,500) (74,400) (75,900)
-------- --------- ---------
BALANCES, December 31, 1996 (unaudited) $213,900 $(962,900) $(749,000)
======== ========= =========
</TABLE>
- -----------------------------
* The General Partner's capital account is eliminated for purposes of the
combined financial statements.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
S-18
<PAGE>
HOMEFREE INVESTORS L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------------
1996 1995 1994
----------- ---------- ----------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (75,900) $ (75,300) $(75,300)
Adjustments to reconcile net loss to net cash used in
operating activities:
Increase in:
Receivable from Homefree Village (418,000) (150,500) -
Resorts, Inc.
Payable to HGP 75,000 75,000 75,000
Payable to unconsolidated affiliates 418,000 150,500 -
--------- --------- --------
Net cash used in operating activities (900) (300) (300)
CASH FLOWS FROM FINANCING ACTIVITIES -
Capital contributions by general partner 900 300 300
--------- --------- --------
NET CHANGE IN CASH - - -
CASH, beginning of year - - -
--------- --------- --------
CASH, end of year $ - $ - $ -
========== ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
S-19
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND
SUBSIDIARIES AND HOMEFREE INVESTORS L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995, IS UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS:
-------------------------------------
Nature of Operations - The Company is engaged primarily in the development
--------------------
and operation of adult recreational communities containing rental sites for
manufactured homes and recreational homes. The Company has interests in such
communities through Aristek Properties, Ltd., and Aristek Western Properties
Limited Partnership, in which the Company is the general partner. The
Company's objectives are to create and participate, through such
partnerships, in the cash flow from these communities and share in
appreciation in the value of such properties. The Company also receives
income from development, management, and administrative services.
Paired Shares - Effective May 2, 1988, Homefree Village Resorts, Inc. and
-------------
subsidiaries (the Company) and Homefree Investors L.P. (the Partnership),
entered into a Pairing Agreement (the Agreement) which provided for the
pairing of assignee limited partnership interests of the Partnership with
shares of common stock of the Company. Subsequently, the Company funded a
distribution of one assignee limited partnership interest of the Partnership
for each share of common stock of the Company.
The shares of the Company's common stock, par value of $.001 per share, and
the assignee limited partnership interests, par value of $.001 per unit, are
"paired" on a one-for-one basis and may only be transferred in units (Paired
Shares) consisting of one share of common stock and one limited partnership
interest.
Continuing Operations - The accompanying financial statements have been
---------------------
prepared on a going concern basis which contemplates the realization of
assets and liquidation of liabilities in the ordinary course of business.
The Company has experienced a significant decrease in revenues over the last
several years due to cash flow difficulties experienced by Aristek Properties
Limited (APL), an investment of the Company of which it is also general
partner (see Note 3). APL has been unable to pay its management fee to the
Company; as a result, the Company ceased accruing management fee revenues due
from APL. The Company also has extended loans to help finance APL's
operations, which has severely impacted the Company's liquidity. During
1994, the Company restructured debt arrangements with APL which provides that
all of APL's available cash flow will be utilized to repay advances to the
Company (see Note 8). As of December 31, 1996, the Company has a significant
net receivable due from APL and is obligated to purchase the limited
partners' interests in APL at a future date for a minimum of $530,000.
Recovery of the Company's net receivable from and investment in APL is
dependent upon further development of APL's underlying properties and for APL
to ultimately achieve profitable operations or the sale of APL at a price in
excess of its liabilities and partners investments.
These conditions raise substantial doubt about the ability of the Company to
continue as a going concern. The accompanying financial statements do not
include any adjustments which might result from the outcome of this
uncertainty.
Management has also taken action in recent years to reduce costs, including
staff reductions, relocation of the corporate offices, and contracting out
its accounting and administrative support functions. In addition, in 1995
the principal operating property of APL, Monte Vista I Joint Venture (Monte
Vista), recently obtained an additional $525,000 in bank financing, and
deferred the due date on its total bank
S-20
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND
SUBSIDIARIES AND HOMEFREE INVESTORS L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995, IS UNAUDITED)
debt of $5,161,300 until December 1998. Management believes that these
actions will enable the Company to continue as a going concern.
Combined and Consolidated Financial Statements - The accompanying
----------------------------------------------
consolidated financial statements include the Company and its majority-owned
subsidiaries. The combined financial statements include the accounts of the
Partnership and the Company. All material intercompany balances and
transactions have been eliminated. The Company's majority-owned subsidiaries
are Resortparks of America, Inc. (RPA), which is 100% owned, and Homefree
General Partners (HGP), which is 90% owned. The minority interest in HGP is
not material.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Property and Equipment - Property and equipment is recorded at cost.
----------------------
Depreciation is provided utilizing accelerated methods over the estimated
useful lives of the related assets.
Impairment of Long-Lived Assets - In the event that facts and circumstances
-------------------------------
indicate that the cost of property and equipment or other long-lived assets
may be impaired, an evaluation of recoverability of net carrying costs will
be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset will be compared to the
asset's carrying amount to determine if a write-down to estimated fair value
is required.
Investments in Unconsolidated Entities - Investments in unconsolidated
--------------------------------------
entities, which are all less than 20% owned, are accounted for by the equity
method because of the significance of the Company's influence as general
partner over operating and financial policies of its investees.
Impairment of Notes Receivable - Effective January 1, 1995, the Company
------------------------------
adopted Statement of Financial Accounting Standards No. 114, as amended (FAS
114). Under FAS 114, the Company evaluated the notes receivable from APL
(see Note 8) for impairment based upon the estimated fair value of the APL's
assets, net of bank debt and other liabilities. No impairment was recognized
since the estimated fair value of APL's net assets is in excess of the
Company's net investment in this loan.
Income Taxes - The Company accounts for income taxes under the liability
------------
method of SFAS No. 109, whereby current and deferred tax assets and
liabilities are determined based on tax rates and laws enacted as of the
balance sheet date. The deferred tax benefit represents the net change in
the deferred tax asset and liability accounts.
No provision for Federal and state income taxes or related benefits has been
made for the Partnership since the Partnership's taxable income or loss is
required to be reported in the income tax returns of the partners. The
provision for income taxes will not bear a normal relationship to pre-tax
operating results on a combined basis, since no provision for income taxes
has been made for the Partnership.
Loss Per Share - The computation of net loss per share is based on the
--------------
weighted average number of shares of common stock and equivalent paired
shares outstanding during the respective years. The effect
S-21
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND
SUBSIDIARIES AND HOMEFREE INVESTORS L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995, IS UNAUDITED)
of outstanding stock options on the computation of net loss per share is
antidilutive for all periods presented.
Cash and Equivalents - For purposes of the Statements of Cash Flows, the
--------------------
Company and the Partnership consider cash and equivalents to include all
highly liquid debt instruments purchased with an original maturity of three
months or less.
Accounting Estimates - The preparation of financial statements in conformity
--------------------
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. The actual results could differ from
those estimates.
The Company's financial statements are based on a number of significant
estimates including the realizability of the Company's investments and
receivables due from unconsolidated entities, and the realizability of land
option costs.
Reclassifications - Certain reclassifications have been made to the 1995 and
-----------------
1994 financial statements to conform to the presentation in 1996. The
reclassifications had no effect on the net loss for 1995 and 1994.
UNAUDITED FINANCIAL STATEMENTS: In the opinion of management, the
------------------------------
accompanying unaudited financial statements contain all adjustments
(consisting only of normal recurring items) necessary to present fairly the
Company's financial position as of December 31, 1996, and the results of
operations and cash flows for the year then ended.
3. INVESTMENTS IN UNCONSOLIDATED ENTITIES:
--------------------------------------
APL was formed in 1976 and the Company is the sole general partner with a 1%
general partner interest and a 2.3% limited partner interest. As general
partner of APL, the Company has a 30% residual interest which entitles it to
receive 30% of all excess cash flow from operations and net proceeds from the
refinancing or sale of properties. APL's principal asset was a 60% joint
venture interest in the Monte Vista I Joint Venture ("MVIJV"). Aristek
Western Properties Limited Partnership ("AWP") owned the remaining 40% joint
venture interest until December 1993 when APL increased its ownership to 99%
and the Company acquired the remaining 1% interest. MVIJV owns an adult
recreational community containing 832 sites for recreational homes. Due to
APL's controlling interest, the accounts of MVIJV are consolidated in APL's
financial statements.
As summarized in Notes 5 and 8, the Company has entered into significant
transactions with APL, resulting in $8.3 million of net receivables and $7.2
million of long-term debt at December 31, 1996. Due to significant
uncertainties about the collectibility of the net receivables from APL,
effective January 1, 1992, the Company suspended recording management fees
and interest income which accrues on the principal balance of notes
receivable in excess of the principal balance of the note payable to APL.
Accordingly, all cash receipts from APL are treated as a reduction in the
principal balance due on the
S-22
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND
SUBSIDIARIES AND HOMEFREE INVESTORS L.P.
NOTES TO FINANICAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995, IS UNAUDITED)
notes receivable. As of December 31, 1996, APL owed the Company an
additional $2.2 million, which represents the net amount of such items which
are not recorded in the accompanying financial statements.
Effective June 30, 1994, the partners of APL consented to a restructuring of
the intercompany loans whereby all of APL's excess cash flow will be utilized
to repay outstanding advances. The interest rate was reduced from 8.1% to
7%, and the maturity date was extended to June 30, 1998. The parties to the
intercompany loans agreed to provide set-off rights in the event of a default
with respect to either the restructured notes or the underlying debt of
MVIJV. APL also agreed to pay additional interest equal to 75% of the net
proceeds from a refinancing or sale of the Monte Vista property, after
repayment of all liabilities. In connection with the restructuring, the
holders of 26.5 limited partner units of APL agreed to provide the Company
with an option to purchase their units for a minimum purchase price of
$20,000 per unit or a total of approximately $530,000. Based on an appraisal
of the Monte Vista property which is required to be prepared at the date the
Company exercises its option, the Company may be required to pay a higher
price per unit. The Company is required to exercise its option between
January 1, 1997 and November 30, 1998. No gain or loss was recognized on
this restructuring transaction.
Condensed balance sheets and operating statements of APL are presented below
(in thousands).
BALANCE SHEETS
December 31,
-----------------------------
1996 1995 1994
------- ------- -------
(unaudited)
ASSETS:
Properties, net of depreciation $ 6,191 $ 6,355 $ 6,596
Receivables from the Company:
Notes 7,154 7,154 7,154
Accrued interest 1,272 764 256
Cash and temporary cash investments 286 665 833
Other assets 241 304 320
------- ------- -------
$15,144 $15,242 $15,159
======= ======= =======
LIABILITIES AND PARTNERS' DEFICIT:
Mortgage payable $ 5,161 $ 5,015 $ 4,493
Payable to the Company:
Notes 11,208 11,208 11,208
Accrued interest 1,177 694 198
Management and administrative fees 465 361 226
Other liabilities 1,800 1,542 1,490
Partners' deficit (4,667) (3,578) (2,456)
------- ------- -------
$15,144 $15,242 $15,159
======= ======= =======
S-23
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND
SUBSIDIARIES AND HOMEFREE INVESTORS L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995, IS UNAUDITED)
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
------------------------
Years Ended December 31,
----------------------------------------
1996 1995 1994
-------------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
REVENUES:
Rentals and other operating income $ 2,185 $ 2,045 $ 1,905
Interest and other income 524 533 575
------- ------- -------
Total 2,709 2,578 2,480
Expenses:
Operating (2,050) (1,973) (1,954)
Interest (1,343) (1,325) (1,310)
Depreciation and amortization (405) (402) (410)
Minority interest - - -
------- ------- -------
NET LOSS $(1,089) $(1,122) $(1,194)
======= ======= =======
Presented below is a reconciliation of APL's net loss to the Company's equity in the losses of
APL:
Years Ended December 31,
---------------------------------
1996 1995 1994
------- ------- -------
NET LOSS OF APL $(1,089) $(1,122) $(1,194)
Adjustments to remove net expenses of APL which are
not recorded as income by the Company:
Interest expense 795 795 815
Interest income (508) (508) (547)
Administrative fees 95 95 95
Management fees 48 41 42
------- ------- -------
ADJUSTED LOSS $ (659) $ (699) $ (789)
======= ======= =======
EQUITY IN LOSS BASED ON 3.3% OWNERSHIP INTEREST $ (22) $ (23) $ (26)
======= ======= =======
</TABLE>
The Company also owns a 2.6% interest in AWP and is the general partner. AWP
is a limited partnership with investments in real estate. Until 1994, the
Company owned a 2.0% general partner interest in Grandview Club Ltd.
(Grandview Club). The primary property held by Grandview Club was foreclosed
on by a bank in 1991 and the partnership's affairs were concluded in 1994
when all remaining assets were liquidated.
S-24
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND
SUBSIDIARIES AND HOMEFREE INVESTORS L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995, IS UNAUDITED)
4. INCOME TAXES:
------------
Deferred income taxes relate exclusively to long-term assets and liabilities
and consist of the following as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(unaudited)
Deferred tax assets (liabilities):
<S> <C> <C>
Notes receivable - installment sales $(509,000) $(509,000)
Partnership basis differences 22,000 38,000
Receivable reserves 485,000 485,000
Net operating loss carryforwards 667,000 198,000
Other 21,000 14,000
--------- ---------
Net 686,000 226,000
Valuation allowance related to deferred tax assets (686,000) (226,000)
--------- ---------
$ - $ -
========== ==========
</TABLE>
For income tax reporting purposes, the Company and RPA file a consolidated
return. The composition of the income tax benefit for the years ended
December 31, 1996, 1995, and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- --------- --------
<S> <C> <C> <C>
Current $ - $ - $ -
Deferred:
Federal - 183,800 80,000
State - 16,200 7,000
----- -------- -------
Total $ - $200,000 $87,000
===== ======== =======
</TABLE>
S-25
<PAGE>
Following is a reconciliation of the Company's effective tax rate on the
consolidated loss to the statutory U.S. Federal income tax rate for the
years ended December 31, 1996, 1995, and 1994:
1996 1995 1994
------ ------ ------
(unaudited)
Statutory rate (34)% (34)% (34)%
State taxes, net of Federal benefit (3) (3) (3)
Graduated tax rates - - -
Change in valuation allowance 37 (12) 10
------ ------ ------
Effective tax rate 0% (49)% (27)%
====== ====== ======
As of December 31, 1996, the Company and RPA had a tax net operating loss
carryforward of approximately $969,000. This loss carryforward will expire
in 2009, 2010 and 2011 if not previously utilized to offset taxable income
of the Company and RPA.
During 1993 and 1994, the Company provided a valuation allowance for a
portion of the Company's deferred tax assets since the treatment of certain
items reported on the Company's income tax returns was uncertain. During
1995, the Internal Revenue Service completed an examination of the Company's
Federal income tax returns for 1992 through 1994 and it became apparent that
the items were properly reported. Accordingly, a portion of the valuation
allowance provided in prior years was reversed in 1995. The valuation
allowance also increased due to 1995 and 1996 losses.
5. LONG-TERM DEBT:
--------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
---------- ----------
(unaudited)
<S> <C> <C>
Restructured note payable - APL, interest at 7%, due June 1998. $7,154,500 $7,154,500
Contract payable for purchase of land, interest imputed at 12%, due July 1997. 44,400 44,400
---------- ----------
Total 7,198,900 7,198,900
Less current maturities (44,400) (44,400)
---------- ----------
$7,154,500 $7,154,500
========== ==========
</TABLE>
S-26
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND
SUBSIDIARIES AND HOMEFREE INVESTORS L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995, IS UNAUDITED)
The scheduled annual principal reductions of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
- --------------------------
<S> <C>
1997 $ 44,400
1998 7,154,500
----------
Total $7,198,900
==========
</TABLE>
6. STOCK INCENTIVE PLANS:
---------------------
The Company has a stock option plan which enables officers and employees of
the Company to purchase shares of common stock at its fair market value on
the date of the grant. The Company has reserved a total of 1,250,000 shares
for options which may be granted under the plan. Options may be exercised
for a maximum term of ten years after the date of grant. At December 31,
1996, all options previously granted under the Plan had expired.
The Company also has a stock appreciation rights plan, whereby up to 250,000
rights may be awarded to certain directors, officers and employees. The plan
entitles the holder of the rights to receive upon redemption, the increase,
if any, of the market value of the Company's common stock at the redemption
date over the market value at date of grant. Each right has a maximum term
of ten years after the date of grant. One right is deemed the equivalent of
one share of common stock. No rights have been granted as of December 31,
1996.
7. LAND OPTION COSTS:
-----------------
In October 1993, the Company entered into an option agreement for the
purchase of a parcel of land which is adjacent to property owned by APL.
Under the option agreement, the Company paid $38,200 for the option and
agreed to loan an additional $125,000 to the seller. The option was
originally exercisable until April 1, 1995 through the payment of an
additional $46,800 and the application of the $125,000 loan to the purchase
price. During 1996, the parties agreed to extend the exercise period through
July 1, 1997.
At December 31, 1995 and 1994, the Company recorded the total payments
required to purchase the land as land option costs in the accompanying
balance sheets. The required payments were discounted at 12% to arrive at a
total cost for the land of $195,600.
S-27
<PAGE>
HOMEFREE VILLAGE RESOTS, INC. AND
SUBSIDIARIES AND HOMEFREE INVESTORS L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995, IS UNAUDITED)
8. RELATED-PARTY TRANSACTIONS:
--------------------------
Receivables from unconsolidated entities consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ ------------
(unaudited)
<S> <C> <C>
Restructured notes receivable from APL, 7%, due June 1998 $ 9,290,700 $ 9,602,100
Less allowance for doubtful accounts (1,000,000) (1,000,000)
----------- -----------
Net 8,290,700 8,602,100
Other receivables, unsecured:
Advances to AWP 8,200 6,400
Advances to Monte Vista 17,800 11,700
----------- -----------
Total $ 8,316,700 $ 8,620,200
=========== ===========
</TABLE>
In 1990, the Company entered into two separate like-kind exchange
transactions with APL. In one transaction, the Company conveyed land to APL
in return for cash and a note receivable for $3,317,800. The Company has
deferred the gain of $488,500 on this transaction until sufficient cash
payments are received by the Company on the note to qualify the transaction
as a sale. In the second transaction, APL conveyed land to the Company in
return for cash and a note payable of $7,154,500 (see Note 5). Also, in
connection with this second transaction, the Company advanced (by delivering
a certificate of deposit) $5,300,000 in the form of a note receivable to APL
to enable APL to pay off bank debt it had on this property. The Company also
made advances to APL to enable it to finance its operating needs.
The collection of notes receivable and advances from APL is dependent upon
future events, including the ability of Monte Vista to develop certain
additional land in a manner which will provide APL with a return of its
capital after the repayment of loans made to Monte Vista. At December 31,
1990, management provided an allowance of $1,400,000 and $900,000 against
these notes receivable and advances, respectively, due to the uncertainty of
the successful outcome of this development project. In 1991, because of
reservations regarding the ability of APL to continue operations with its
existing debt level, $1,300,000 of the obligation from APL was forgiven by
the Company with a corresponding reduction in the allowance previously
provided.
Receivable from Officer and Administrative Fees - Pursuant to the Homefree
-----------------------------------------------
Investors Limited Partnership Agreement, the Partnership is liable to pay an
annual administrative fee of $75,000 per year to HGP, which in turn pays this
fee to a general partner of HGP, which is an entity owned 100% by the
president of the Company. Such administrative fee is not payable until the
earlier of the date that, in the opinion of the general partners, the
Partnership has sufficient cash to pay the fee without jeopardizing the
Partnership or the Company, or upon liquidation of the Partnership. This fee
is included in the Partnership's financial statements and is also reflected
as an expense in the Company's financial statements since the Company is a
general partner of the Partnership and, as such, may ultimately be required
to fund the obligations of the Partnership.
S-28
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND
SUBSIDIARIES AND HOMEFREE INVESTORS L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995, IS UNAUDITED)
Over the past several years, the Company has made a series of cash advances
to, and on behalf of, the Company's president. These advances are evidenced
by formal notes which bear interest at approximately 3.8% as of December 31,
1996. The following is a summary of activity during the years ended December
31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Notes receivable, beginning of year $ 310,000 $ 520,900 $ 392,200
Cash advances - 210,200 113,400
Accrued interest 11,300 12,100 15,300
Deemed repayment ( 52,400) (433,200) -
--------- --------- ---------
Notes receivable, end of year 268,900 310,000 520,900
Less allowance for bad debts (268,900) (310,000) (520,900)
--------- --------- ---------
$ - $ - $ -
========= ========= =========
</TABLE>
The president has always intended to repay the notes from the annual
administrative fee discussed above. Accordingly, since the Company will
ultimately be required to fund the administrative fee in order to collect the
receivables, for financial reporting purposes the initial $75,000 of cash
advances and/or accrued interest in each year has been recorded as the
Company's funding of the administrative fee. For cash advances and accrued
interest in excess of $75,000 per year, the Company recognized a loss due to
substantial uncertainty regarding the collectibility of such amounts.
During 1995, a total of $433,200 was designated for the deemed payment of
administrative fees and related repayment of notes receivable with no effect
on the Company's cash flows. For financial reporting purposes, the deemed
repayment of notes receivable from the president represents a write-off of
receivables which had been fully provided for through a related allowance for
bad debts. Without regard to the deemed repayment, through December 31,
1995, the Company has recognized cumulative losses (including the $75,000
annual provision for the administrative fee) on the notes receivable of
$743,200 compared to cumulative administrative fees of $674,000.
Accordingly, the Company's financial statements include recognition of
$69,200 of expenses in excess of the cumulative contractual amount of the
administrative fee. During 1996, a total of $52,400 was designated for the
deemed repayment and payment of administrative fees equalled contractual
amounts.
Revenues - The Company and its corporate subsidiaries serve as a real estate
--------
advisor, developer, manager and marketing agent and perform certain
administrative functions for related entities. The Company's principal
sources of revenue are fees, commissions and cash flow participation from
properties under its supervision (see Note 3).
9. FINANCIAL INSTRUMENTS:
---------------------
Statement of Financial Accounting Standards No. 107 requires all entities to
disclose the fair value of certain financial instruments in their financial
statements. Accordingly, at December 31, 1996, management's best estimate is
that the carrying amount of cash and equivalents, contract payable, and
accounts payable and accrued expenses approximates fair value due to the
short maturity of these instruments. For the Company's investment and
receivables due from APL and AWP, management believes that fair value is
approximately equal to the carrying value as of December 31, 1996.
S-29
<PAGE>
HOMEFREE VILLAGE RESORTS, INC. AND
SUBSIDIARIES AND HOMEFREE INVESTORS L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995, IS UNAUDITED)
10. SIGNIFICANT CONCENTRATIONS:
--------------------------
The Company has an investment of $12,100, receivables of $8,290,700, and
long-term debt of $7,154,500 which is payable to APL and its subsidiary.
Due to the Company's current general and limited partner interests in APL
and the commitment described in Note 3 to purchase an additional 26.5
limited partner units, the Company has a substantial concentration of its
net assets which are dependent upon the future success of APL.
Substantially all of the Company's receivables, investments in
partnerships, and land option costs relate to properties which are located
in the Phoenix, Arizona metropolitan area. This concentration may impact
the Company's ability, either positively or negatively, to realize the
carrying value of these assets.
The Company earns substantially all of its management and administrative
fees from APL and Aristek Western Properties Limited Partnership.
S-30
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Partners
Aristek Properties, Ltd.
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Aristek
Properties, Ltd. (a limited partnership) and its subsidiary as of December 31,
1995, and the related consolidated statements of operations, changes in
partners' deficit, and cash flows for the years ended December 31, 1995 and
1994. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aristek Properties,
Ltd., and its subsidiary as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for the years ended December 31, 1995 and
1994, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern, which contemplates the realization
of assets and liquidation of liabilities in the normal course of business. As
discussed in Note 1 to the financial statements, the Partnership has suffered
substantial operating losses, and anticipates the need for additional cash to
fund operations. These conditions raise substantial doubt about the ability of
the Partnership to continue as a going concern. Management's plans in regard to
these matters are also discussed in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Hein + Associates LLP
Denver, Colorado
June 12, 1996
S-31
<PAGE>
ARISTEK PROPERTIES, LTD. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
------------- -------------
(unaudited)
-------------
ASSETS
------
OPERATING PROPERTIES:
<S> <C> <C>
Land $ 1,239,381 $ 1,239,381
Land improvements 5,290,711 5,235,140
Buildings and improvements 2,716,077 2,716,077
Furniture and equipment 1,485,574 1,300,019
----------- -----------
Total operating properties 10,731,743 10,490,617
Less accumulated depreciation and amortization (5,590,558) (5,185,898)
----------- -----------
Net operating properties 5,141,185 5,304,719
OTHER ASSETS:
Cash and equivalents 286,214 664,730
Note receivable from General Partner 7,154,529 7,154,529
Accrued interest receivable - General Partner 1,272,000 764,000
Deferred loan costs, net of accumulated amortization of $128,941
(unaudited) and $73,405 110,846 166,382
Land held for development 1,050,000 1,050,000
Rent and other receivables 49,066 103,890
Other assets 80,463 34,033
----------- -----------
TOTAL ASSETS $15,144,303 $15,242,283
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
LIABILITIES:
Mortgage payable $ 5,161,326 $ 5,015,346
Notes payable to General Partner 11,207,870 11,207,870
Accrued interest payable - General Partner 1,177,499 694,000
Accrued management and administrative fees - General Partner 464,599 360,679
Accounts payable and accrued expenses 163,932 125,798
Unearned rental income 1,411,185 1,228,124
Payable to affiliate 224,433 188,433
----------- -----------
Total liabilities 19,810,844 18,820,250
COMMITMENT AND CONTINGENCY (NOTE 1)
PARTNERS' DEFICIT (4,666,541) (3,577,967)
----------- -----------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $15,144,303 $15,242,283
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
S-32
<PAGE>
ARISTEK PROPERTIES, LTD. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING REVENUE:
Rental income $ 2,141,042 $ 2,004,648 $ 1,862,058
Other 43,529 40,671 43,149
----------- ----------- -----------
Total revenue 2,184,571 2,045,319 1,905,207
----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Salaries, wages and benefits 716,464 623,131 667,081
Maintenance and repairs 222,875 227,252 204,053
Utilities 265,061 260,827 279,916
Property taxes 69,374 69,221 72,092
Management and administrative fees - 215,975 191,533 194,853
General Partner
Depreciation 404,660 401,621 409,884
General and administrative 560,557 601,764 536,915
----------- ----------- -----------
Total operating costs and expenses 2,454,966 2,375,349 2,364,794
----------- ----------- -----------
OPERATING LOSS (270,395) (330,030) (459,587)
OTHER INCOME (EXPENSE):
Interest income:
General Partner 508,000 508,000 547,398
Other 16,382 24,981 27,704
Interest expense:
General Partner (795,000) (795,000) (814,806)
Other (547,561) (529,990) (495,095)
----------- ----------- -----------
NET LOSS $(1,088,574) $(1,122,039) $(1,194,386)
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
S-33
<PAGE>
ARISTEK PROPERTIES, LTD. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
<S> <C>
PARTNERS' DEFICIT, January 1, 1994 $(1,261,542)
Net loss (1,194,386)
-----------
PARTNERS' DEFICIT, December 31, 1994 (2,455,928)
Net loss (1,122,039)
-----------
PARTNERS' DEFICIT, December 31, 1995 (3,577,967)
Net loss (unaudited) (1,088,574)
-----------
PARTNERS' DEFICIT, December 31, 1996 (unaudited) $(4,666,541)
===========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
S-34
<PAGE>
ARISTEK PROPERTIES, LTD. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,088,574) $(1,122,039) $(1,194,386)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 404,660 401,621 409,884
Amortization of deferred loan costs 55,536 55,137 136,376
Changes in operating assets and liabilities:
Decrease (increase) in:
Rent and other receivables0 54,824 (44,322) 19,841
Accrued interest receivable - General (508,000) (508,000) (547,398)
Partner
Other (46,430) (71,905) 5,954
Increase (decrease) in:
Accounts payable and accrued expenses 142,054 116,225 62,569
Accrued interest payable - General Partner 483,499 496,000 675,875
Unearned rental income 183,061 49,346 173,710
Payable to affiliate 36,000 99,500 79,183
----------- ----------- -----------
Net cash used in operating activities (283,370) (528,437) (178,392)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for operating properties (241,126) (160,224) (189,156)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage loans 170,507 522,043 269,300
Principal payments on mortgage loans (24,527) (1,888) (7,087)
Principal payments on loans from General Partner - - (95,000)
Proceeds from release of loan escrow deposit - - 600,000
Payment of deferred loan costs - - (56,811)
----------- ----------- -----------
Net cash used in financing activities 145,980 520,155 710,402
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (378,516) (168,506) 342,854
CASH AND EQUIVALENTS, AT BEGINNING OF YEAR 664,730 833,236 490,382
----------- ----------- -----------
CASH AND EQUIVALENTS, AT END OF YEAR $ 286,214 $ 664,730 $ 833,236
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
S-35
<PAGE>
ARISTEK PROPERTIES, LTD. AND SUBSIDIARY
(A Limited Partnershp)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION-
Cash paid for interest $ 803,526 $ 773,853 $ 560,719
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Payment of deferred loan costs from mortgage loan proceeds $ - $ 2,278 $ 180,700
Net accrued interest converted to note payable to General Parnter - - $ 2,775,236
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
S-36
<PAGE>
ARISTEK PROPERTIES, LTD. AND SUBSIDIARY
(A limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENTS TO DECEMBER 31, 1995 IS UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS:
-------------------------------------
Organization - Aristek Properties, Ltd. ("the Partnership") is a Colorado
------------
limited partnership formed on June 29, 1976. At December 31, 1996, the
sole general partner is Homefree Village Resorts, Inc. (the "General
Partner"). In accordance with the terms of the Partnership Agreement, the
partnership was extended by the General Partner to December 31, 1998. The
Partnership Agreement provides that partnership profit and loss, after
adjustment for certain gains earned solely by the General Partner, shall be
allocated 1% to the General Partner and 99% to the Limited Partners, in
direct proportion to their respective ownership of limited partnership
units. Under the terms of the agreement, as amended, distributions may be
made to the General Partner based on the adjusted cash flow from operations,
sales and refinancing of the Partnership's properties.
Pursuant to the partnership agreement, the General Partner earns an annual
administrative fee of $94,750. In addition, the Partnership Agreement
provides for additional compensation to the General Partner for certain
services rendered and payment of costs and expenses incurred by the General
Partner on behalf of the Partnership.
Effective June 30, 1994, the partners of the Partnership consented to a
restructuring of the intercompany loans whereby all of the Partnership's
excess cash flow will be utilized to repay outstanding debt to the General
Partner. The interest rate was reduced from 8.1% to 7%, and the maturity
date was extended to June 30, 1998. The parties to the loans agreed to
provide set-off rights in the event of a default with respect to either the
restructured notes or the underlying debt of MVIJV. The Partnership also
agreed to pay additional interest equal to 75% of the net proceeds from a
refinancing or sale of the Monte Vista property, after repayment of all
liabilities. In connection with the restructuring, the holders of 26.5
limited partner units of the Partnership agreed to provide the General
Partner with an option to purchase their units for a minimum purchase price
of $20,000 per unit or a total of approximately $530,000. Based on an
appraisal of the Monte Vista property which is required to be prepared at
the date the Company exercises its option, the General Partner may be
required to pay a higher price per unit. The General Partner is required to
exercise its option between January 1, 1997 and November 30, 1998. No gain
or loss was recognized on this restructuring transaction. When this option
is exercised, there will be a change in control of the Partnership to the
General Partner. However, the General Partner does not presently have
sufficient liquidity to exercise the option.
Nature of Operations - The Partnership is engaged primarily in the
--------------------
development and operation of an adult recreational community containing 832
rental sites for manufactured homes and recreational homes. This community
is located in Mesa, Arizona and offers extensive recreational facilities and
social activities designed to appeal to active pre-retirement and retirement
age people. The rental operations generally include operating leases which
do not extend beyond one year.
Going Concern - The accompanying financial statements have been prepared on
--------------
a going concern basis which contemplates the realization of assets and
liquidation of liabilities in the ordinary course of business. At December
31, 1996, the Partnership has approximately $4.4 million of debt (net of
receivables) payable to the General Partner and a partners' deficit of
approximately $4.7 million. The Partnership has experienced operating
losses in each of the past three years and the Partnership's operating
activities have not generated net cash flow in any of the past three years.
Due to the Partnership's lack of liquidity, it was necessary to restructure
outstanding debt payable to the General Partner during 1994 and, as a
result, the Partnership is required to pay all excess cash flow to the
General Partner until maturity of the debt in 1998. However, the General
Partner has also experienced financial difficulties over the past several
years and is not presently expected to be capable of providing capital to
support operations.
S-37
<PAGE>
ARISTEK PROPERTIES, LTD. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
These conditions raise substantial doubt about the ability of the
Partnership to continue as a going concern. The accompanying financial
statements do not include any adjustments which might result from the
outcome of this uncertainty.
In addition to financial support from the General Partner, in recent years
the Partnership has relied on debt financing from a commercial lender to
support operations and the commercial lender has extended the due date until
December 1998. However, management believes that the ultimate success of
the Partnership is dependent upon the ability to obtain additional funding
to develop its 75-acre parcel of land which is adjacent to the Monte Vista
property. Management believes the Partnership has financing arrangements in
place to allow it to continue in operation through 1997 and efforts are
continuing to obtain additional financing to fully develop the project.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Principles of Consolidation - The financial statements include the accounts
---------------------------
of the Partnership and its affiliate, Monte Vista I Joint Venture (MVIJV).
All material intercompany transactions and balances have been eliminated.
Through 1993, AWP owned a 40% minority interest in MVIJV. In December 1993,
the Partnership acquired 97.5% of AWP's interest and the General Partner
acquired the remaining 2.5%. No amounts are reflected in the accompanying
financial statements for the General Partner's minority interest since MVIJV
incurred losses in each of the past three years and HVR is not funding its
share of the losses. The General Partner's share of such losses is
approximately $24,000 through December 31, 1996.
Property and Equipment - Property is recorded at the lower of cost or net
----------------------
realizable value. Depreciation is provided using the straight-line method
over estimated useful lives, as follows:
Years
-------
Land improvements 20
Buildings and improvements 25
Furniture and equipment 7
The cost of normal maintenance and repairs is charged to operating expenses
as incurred. Material expenditures which increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of properties sold, or otherwise disposed of, and the
related accumulated depreciation or amortization are removed from the
accounts, and any gains or losses are reflected in current operations.
Impairment of Long-Lived Accounting Assets - In the event that facts and
------------------------------------------
circumstances indicate that the cost of property and equipment or other
long-lived assets may be impaired, an evaluation of recoverability of net
carrying costs will be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset will be
compared to the asset's carrying amount to determine if a write-down to
estimated fair value is required.
Partnership Accounting - All income or loss is allocated to the partners in
----------------------
accordance with the Partnership Agreement. The accompanying financial
statements do not include any assets, liabilities or operations attributable
to the partners' individual activities and no provision has been made for
income taxes (credits), as they are the responsibility of the partners.
S-38
<PAGE>
ARISTEK PROPERTIES, LTD. AND SUBSIDIARY
(A Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
Cash Equivalents - For purposes of the statements of cash flows, the
----------------
Partnership considers cash and equivalents to include cash on hand and all
highly liquid debt instruments purchased with an original maturity of three
months or less.
Deferred Loan Costs - Deferred loan costs were incurred in connection with
--------------------
the origination of the mortgage note discussed in Note 4. These costs are
being amortized using the interest method.
Unearned Rental Income - Rental income is typically received in advance for
----------------------
a one year period. The Partnership recognizes rental income ratably over
the period for which the payment relates.
Accounting Estimates - The preparation of financial statements in conformity
---------------------
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. The actual results could differ from
those estimates.
The Partnership's financial statements are based on a number of significant
estimates including the realizability of net operating properties and land
held for development, selection of depreciation methods and estimated useful
lives, and the realization of receivables which affects recognition of
profit on the sale of real estate.
UNAUDITED FINANCIAL STATEMENTS: In the opinion of management, the
------------------------------
accompanying unaudited financial statements contain all adjustments
(consisting only of normal recurring items) necessary to present fairly the
Company's financial position as of December 31, 1996, and the results of
operations and cash flows for the year then ended.
3. NOTE RECEIVABLE:
---------------
The note receivable of $7,154,529 at December 31, 1996 and 1995 is due from
the General Partner and bears interest at 7%. Principal and interest are
due at the maturity date in June 1998.
4. MORTGAGE AND NOTES PAYABLE:
--------------------------
At December 31, 1996 and 1995, the Partnership has a mortgage note payable
with an outstanding principal balance of $5,161,326 (unaudited) and
$5,015,346, respectively. This note bears interest at 4% above the
published LIBOR rate (total of 9.5% at December 31, 1996) and requires
minimum monthly payments at 10%. Payments that exceed the monthly interest
rate are applied to principal. The note is collateralized by operating
properties and land held for development.
Notes payable to the General Partner amount to $11,207,870 at December 31,
1996 and 1995. These notes bear interest at 7% and no principal or interest
payments are due until the maturity date in June 1998.
Assuming the interest rate in effect under the mortgage note payable does
not change after December 31, 1996, the aggregate maturities of debt are as
follows:
<TABLE>
<CAPTION>
Year Ending December 31, Notes Mortgage
- -------------------------- ----------- -----------
<S> <C> <C>
1996 $ - $ 9,600
1997 - 30,000
1998 11,207,870 5,131,326
----------- ----------
$11,207,870 $5,161,326
=========== ==========
</TABLE>
S-39
<PAGE>
ARISTEK PROPERTIES, LTD. AND SUBSIDIARY
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSIQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
5. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK:
-------------------------------------------------------
At December 31, 1996, the Partnership had cash and money market investments
with a single bank which totaled approximately $286,000. The Company has
mortgage debt with a single lender and substantially all of the Company's
tangible assets are pledged as collateral for this obligation.
At December 31, 1996 and 1995, the Partnership had a note receivable from
the General Partner for $7,154,529 and notes payable to the General Partner
for $11,207,870. A right of set-off exists between these instruments but
none of the notes are collateralized. Management does not believe it is
practicable to estimate the fair value of the payables and receivables from
the General Partner due to the financial interest of the General Partner.
Management believes that the fair value of the bank debt is equivalent to
the carrying value due to the floating interest rate. Management believes
that the fair value and carrying value are approximately the same for all
other financial instruments due to the relatively short maturities.
S-40
